India Budget 2015 – Six Sixes, with a foundation for a Good Long Innings

For cricket enthusiasts, the last week saw two glorious innings and sixes galore at the World Cup from Chris Gayle and A B De Villiers. Indophiles were seeking the same from the first real budget of the Modi Jaitley duo – some big sixes out of the stadium or big bang reforms as it was more popularly known in the run up to the Budget.

So did Budget 2015 deliver on those expectations?
We thought there were a few sixes, but mostly a combination of singles, twos and boundaries, essentially an innings that is being built for the long term so that India is well prepared to hit many more sixes when it really matters.

1. Inflation targeting agreement with RBI – Inflation and inflationary expectations have been a huge challenge for India, and we will now have both the Central Bank and the government willing to work together through a Monetary Policy committee to have coordinated action on the inflation front. Inflation is the single largest variable that influences your personal financial plan, so stability around inflation should be your biggest benefit as an investor.
2. Roll out of the Goods and Services Tax (GST) by April 2016 – We finally have a clear date to look forward to, for a tax regime that is potentially much easier. Remember though, that GST will take a couple of years to settle down, and is not likely to change things overnight.
3. Scrapping of the Direct Tax Code (DTC) – Stability of a tax regime is most critical and the DTC was trying to change too many things at once. It got a quiet burial in this budget.
4. Focus on ease of doing business – Whether you run your own businesses or are salaried, the need to get rid of red tape and make it simpler and easier to move forward, will be of huge help. Plug and Play could be significant.
5. Collaborative Centre State Relationships – The Big Daddy approach of the Central government, getting replaced by a collaborative approach and greater flexibility for states to spend their monies in areas where they think it is most relevant, is refreshing. After all, don’t we all think that it is critical to know what’s happening on the ground to finally decide.
6. Focus on financial assets – With most Indian households having a significant portion of their wealth in physical assets like real estate and gold, there has been a significant effort to get savings towards financial assets. This focus is evident through the fact that even where the underlying asset could still be physical, products like Real Estate Investment Trusts ( REITs) and sovereign gold bonds get a fillip.

Union Budget 2015 and your financial life

Your income

1. Additional 2% surcharge on annual taxable income – In case you earn more than Rs. 1 crore, you will need to pay a higher tax due to this enhanced surcharge.
2. Transport allowance exemption doubled to Rs 19200 per annum – Most people will benefit, and expect your employer to restructure your salary so that this benefit is available for you.
3. Additional tax saving of Rs 50000 per annum by investing in the New Pension Scheme (NPS) – Whilst the tax break is important, weigh this tax benefit vis a vis the fact that the returns from the NPS are taxable, and necessarily need to be annuitized to a significant extent. Ensure that your choice of a retirement product is not driven by the tax benefit alone.
4. Higher deductions on health insurance – Limits raised to Rs. 25000 per annum for those below 60 and Rs. 30000 per annum for those above 60. In case of those over 80, even though they may not be covered by health insurance, medical expenses of upto Rs. 30000 will be permitted as a deduction.

Your expenses

1. Increase in service tax – You will need to pay higher service tax for the services that you consume, as service tax has been raised to 14%. In addition, there is an enabling provision to charge 2% additionally as a cess, which may or may not be used. If introduced, service tax could then move to 16%.
2. Better targeted subsidies – In the past, we may have all benefited due to the fact that subsidies were provided across the board. With significant focused on direct benefit transfers, expect these subsidies to be available only to those who truly need it. The JAM trinity (Jan Dhan, Aadhaar and Mobile numbers) could have this working quicker than anticipated.
3. PAN mandatory for all expenses above Rs. 1 lakh – Whilst this will help in curbing unaccounted money, let’s hope that the process does not increase notices to people who are paying all their taxes anyways.

Your Overall portfolio

1. Scrapping of wealth tax – making it easier for you to decide on which asset class to invest in rather than worrying about tax arbitrage on one asset class over another.
2. Asset allocation continues to hold the key – Whilst Union Budgets can tactically create some short term opportunities, this budget was devoid of any such big opportunities, and is a more workman like budget , getting you to focus on how your investments are structured to benefit from the long term story of India.
3. Your overseas holdings need to be fully reported and taxes paid – If you have ever worked overseas or have any monies, bank accounts, assets held overseas and have been too busy to declare them, please ensure you do so now as the penalties are very significant from now on.

Your investments in equity markets

1. Capital gains tax benefits remain as is – India has one of the most advantageous tax regimes for long term capital gains taxes in equity markets through stocks and mutual funds. There has been no change in this regard.
2. Corporate tax reduction from 30% to 25% over four years – With the effective tax rate in India being approximately 23% currently, this is unlikely to be a significant change. In fact, for FY 15-16, corporate  taxes will go up marginally.
3. Multiple answers for foreign investors – Many unanswered questions for foreigners have been answered – no retrospective taxation, GAAR being deferred, a composite cap for foreign investments instead of FPI and FDI limits separately, amongst others.
4. Infrastructure gets a big boost – The multiplier that infrastructure growth can create, can be significant if the challenges of the past can be addressed. Initiatives like plug and play, greater focus on roads and power, and some innovative financing tools like the National Investment and Infrastructure Fund, could move GDP up significantly, which could see India remain a favorite investment destination for foreigners to invest in through equity markets.
5. High strategic disinvestment target – Whilst the companies that will be divested is unclear, there is an expectation that privatization could come back as details of this become clearer, ensuring the government stays in businesses only where it absolutely needs to.

As earnings continue to be sluggish, look to build your exposure to equities gradually over the six months to 1 year through systematic investment strategies, so that you can take advantage of volatility driven by news from overseas and domestic issues.

Your investments in fixed income

1. Fiscal deficit at 3.9% of GDP– With the government sticking to its medium term target of 3% but moving it by a year, it seemed like a tight balancing act, trying to keep the foreigners and rating agencies controlled on one side, and people screaming for growth through higher spending quiet on the other.
2. Net Market borrowing at Rs 4.56 lakh crores – There was a wide range of expectations on this number, and the fact that it has gone up only marginally vis a vis last year, will mean that supply of government paper will be controlled, thereby helping in controlling interest rates.
3. TDS on recurring deposits and cooperative banks introduced – As a part of the widening of the tax net, recurring deposits will also be subject to TDS from June 2015 and deposits with cooperative banks will also be subject to TDS.
4. Dividend distribution tax on debt funds hiked marginally – increased from 28.325% to 28.84 % is unlikely to have any significant impact.
5. Tax free bonds make a comeback – With the focus on infrastructure, the government has announced issuance of tax free bonds, which should enable investors seeking to lock into interest rates for a longer duration, an option to do so.

Whilst the timing of the next interest rate cut is going to be challenging to guess, the expectation of lower interest rates in the economy over the next 12 -24 months should continue. Thus, having between one third to half of your portfolio to take advantage of falling interest rates through government securities, income funds and dynamic bond funds would be a suggested approach.

Your investments in gold

1. Import duty on gold remains as is– There was a consensus view that import duties on gold would be reduced either partially or fully. They have been kept as is, keeping domestic gold prices elevated vis a vis international prices
2. Introduction of sovereign gold bonds – Whilst gold ETFs and gold mutual funds already exist giving you access to the change in prices of gold without holding it physically, gold bonds are expected to also pay a fixed return, making gold a potential income generating instrument from only being dependent on capital gains for investors to generate returns. Details are awaited.
3. Demonetisation of physical gold – With a significant amount of gold in India lying in cupboards and lockers, the gold monetization scheme that was announced is expected to get investors to deposit their gold and earn a rate of return on it. Similar schemes have not worked in the past, so we will have to see how it is structured to make it succeed this time.

Your investments in Real Estate

1. Real Estate Investment Trusts ( REITs) and Infrastructure Investment Trust (InviTs) get tax clarity –  Whilst these are very popular overseas, the lack of tax clarity prevented them from taking off. With the pass through status of these vehicles getting clarity, expect these to be launched this year, and a potential new addition to your portfolio.
2. Black money reduction – Multiple steps like making it mandatory for all payments and receipts for real estate transactions above Rs. 20000 to be in cheque and a benami transaction prohibition bill should result in reduction of black money reduction in real estate.

So whilst India continues on its journey to retain its World Cup Cricket title, let’s hope the implementation of this budget makes India retain its most favoured investment destination status in the years ahead.

Read Full Post »

Penny-Wise, Pound-Wiser – Article by Vishal Dhawan in India Today

Want to get the most from this budget? Individuals and families can get the most benefit from the union budget only if they have made their own budget first – says Vishal Dhawan in India Today. Read on to know why it is critical to prepare a household budget.

Read Full Post »

Best ways to Invest for your Child’s Education – Vishal Dhawan in TOI

Read Full Post »

Make a FINANCIAL CONSTITUTION – Article by Vishal Dhawan in Khaleej Times, Dubai

Read Full Post »

Financial Vows Every Newlywed should take..

Read Full Post »

Don’t park all your Retirement Funds in FDs – A case study by Vishal Dhawan

Read Full Post »

Healthcare – A Key Element of Retirement Plan – Vishal Dhawan in The Times of India

Read Full Post »

Make 2015 Your Best Year Ever! Vishal Dhawan in Men’s Health Magazine

Read Full Post »

Our Market Mantra for December 2014

The year 2014 was mostly a year full of positive events for Indian financial markets which caused the equity markets (BSE Sensex) gaining close to 30% in 2014 . Some of the major events that took place are as follows and our outlook in 2015:

1. Historical electoral results – A strong, pro- growth oriented and business friendly government looks good for economic growth and for businesses. This promise has to translate into big reforms on the ground as most of the early work has been focused on getting the bureaucracy and decisions that were deferred forward.
2. The GDP growth for Q3 2014 expanded to 5.3% from 5.7% in Q2. It is expected to pick up further to 6-6.5% YOY in FY16 with growth over other parts of the world remaining subdued and hence the gap of India GDP Growth with Global GDP growth is expected to widen as seen from the data below:

Source:  IMF, credit Suisse Research, Dec 2014

3. Current Account Deficit (CAD) widened in 2Q FY15 due to widening of trade deficit. However, it is expected to be in a comfort zone in FY16 with falling crude oil prices offsetting high import growth of non-oil and gold.

Source:  RBI, Citi Research, Dec’14

4. Fiscal Deficit for the first 8 months of FY15 (Apr-Nov) came in at 99% of the budget estimate of 4.1% for the full fiscal year. Whilst it is still possible that the government could achieve the target by controlling spending for this year, the fiscal deficit target of 3.6% of GDP in FY16 could be difficult to meet.

Source:  Budget Documents, Citi Research, Nov’14, BE=Budgeted Estimate

5. Earnings Growth: The private sector in India remains in a deleveraging cycle, saddled with excess debt. However, Corporate Earnings should be better than estimates as corporate margins are significantly below the long term averages and should improve gradually as capacity utilization and business conditions improve in the next 2-3 years which is when the full impact of lower interest costs and softer commodity prices will show up in corporate profits.

Source: Motilal Oswal Research, November 2014

The outlook for equities in 2015 could be challenging, but things look promising from a longer term perspective and there is merit in increasing allocation to equities in a phased manner and staying invested. However, every investor should look at their own specific asset allocations rather than specific asset class performances.

6. Inflation declined to a series low due to lower commodity prices, slowdown in consumer demand, low growth in MSPs and falling oil prices. CPI inflation eased to a series-low 4.4% in November 2014 from 5.5% in October 2014 in year-on-year (y-o-y) terms. This primarily reflected a sharp decline in food inflation to 3.6% in November 2014 from 5.7% in October 2014, as well as a fall in core-CPI to 5.5% from 5.9%. In fact, WPI inflation declined to 0% in November 2014.

Source: CSO, ICRA Research

In the December Policy review, RBI kept the rates unchanged and revised the CPI target to 6% for March 2015 and also as per RBI, the risks to the Jan 2016 CPI target of 6% looks balanced. There could be concerns during the first quarter of 2015 as RBI waits for certainty with regards to lower/stable inflation, and fiscal adjustments during the budget before commencing any monetary easing and interest rate cuts. Global concerns over interest rate hike in US and movement of global crude oil prices will also keep investors guessing on the direction of interest rates in India.

Fall in inflation and slow economic growth would lead to cut in interest rates in future. As seen from the chart below, bond yields have moved sooner than policy rates more often. Currently also, the yields have fallen in anticipation of a rate cut.

Source: RBI, Bloomberg

RBI is also targeting a real positive return on interest rates to potentially move savings from physical assets to financial assets. This could mean that a 6% CPI inflation would synchronize with a 7% repo rate – which means a 100 bps cut in repo rate over the next 18 months.

Investors will need to have a sufficiently long time horizon ( 12-24  months) when investing in duration strategies now, especially given that the first 25 bps of the expected cuts are perhaps already in the price.

Thus, we would recommend continuing to stay invested in a portfolio with a mix of longer maturities and accrual funds, which are likely to benefit as interest rates are expected come down in the next 18-24 months.

7. The global equity markets also continue to perform well with US markets reaching new highs. Crude oil prices corrected to a 5.5 year low due to significant new supply of shale gas from U.S., slowdown in global demand, and a reduction in per unit consumption in automobiles due to better and efficient technology. So, there’s enough reason to believe that oil prices will remain favourably low. Obviously, a sharp drop in oil prices can potentially create some pressures in oil exporting countries like Russia and in market players who were perhaps overextended in trading.

Also, lower oil prices reduce inflationary pressures and current account deficits allowing emerging market central banks greater freedom to stimulate domestic economies.

We think 2015 is going to be a year of divergence in economic growth and central bank policy. While the US is leading developed markets growth, Europe and Japan are struggling for growth at this point of time and China is still in search of its sustainable growth formula. So we could have central banks across the globe moving in a de-synchronized manner where US is looking to normalize its interest rate structure, while Japan and Europe will still continue to adopt loose monetary policy conditions to fight deflation in their economy. This divergence in policy action will increase market volatility and require investors to pay more attention to risk management.

8. Currency: Dollar strength and one of the drivers of this trend is the shale gas revolution which US is experiencing and its impact on shrinking the US economy’s current account deficit. This could pose some challenges for emerging markets but stronger fundamentals should limit the financial risks for those emerging market which have already gone through a course correction over the last 18 to 24 months.

Hence, we continue to reiterate to build a well diversified portfolio with having exposure of between 10-15% into international investments to hedge against currency risk.

9. Gold prices could continue to remain under pressure in the short term due to the fear of interest rate hike in US. Whilst the INR currently looks a little overvalued and is expected to depreciate, Gold as an asset class could gain value as it has an inverse relationship with the Indian currency traditionally.

Hence, we continue to believe to have gold as small part of the portfolio for the purpose of diversification and hedge currency risk.

Read Full Post »

#AddMeaningToFinances #FinancialResolutions #BestFinancialPlanners Vishal Dhawan brings up some simple ways to assure you a peaceful financial life – TOI

Read Full Post »